Question

Hazelnut Corp. manufactures lawn ornaments. It currently has two product lines, the basic and the luxury. Hazelnut has a total of $174,765 in overhead. The company has identified the following information about its overhead activity cost pools and the two product lines: Activity Cost Pools Materials handling Quality control Machine maintenance Cost Driver Number of moves Number of inspections Number of machine hours Cost Assigned to Pool $ 4,290 $ 31,875 $ 138,600 Quantity/Amount Consumed by Basic 24 moves 220 inspections 5,600 machine hours Quantity/Amount Consumed by Luxury 54 moves 110 inspections 4,300 machine hours Required: 1. Suppose Hazelnut used a traditional costing system with machine hours as the cost driver. Determine the amount of overhead assigned to each product line. (Do not round intermediate calculations and round your final answers to the nearest whole dollar amount.) Basic Model Overhead Assigned Overhead Assigned Luxury Model

Answer 1

1.

Traditional costing system

Basic model = Total overhead * [5,600 / (5,600 + 4,300)]

= $174,765 * [5,600 / 9,900]

= $98,857

Luxury model = Total overhead * [4,300 / (5,600 + 4,300)]

= $174,765 * [4,300 / 9,900]

= $75,908

2.

	Activity rates
Materials handling [$4,290 / (24 + 54)]	$55
Quality control [$31,875 / (220 + 110)]	$97
Machine Maintenance [$138,600 / (5,600 + 4,300)]	$14

3.

Basic Model
Materials handling ($55 * 24)	$1,320
Quality Control ($97 * 220)	$21,340
Machine Maintenance ($14 * 5,600)	$78,400
Total Overhead assigned	$101,060

4.

Luxury Model
Materials handling ($55 * 54)	$2,970
Quality Control ($97 * 110)	$10,670
Machine Maintenance ($14 * 4,300)	$60,200
Total Overhead assigned	$73,840

5.

ABC system is more accurate than the Traditional system because it divides overhead according to the usage.